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Life, liberty, and property do not exist because men have made laws. On the contrary, it was the fact that life,liberty, and property existed beforehand that caused men to make laws in the first place. - Frédéric Bastiat

Sunday, May 15, 2005

The error of protectionist economics

China said Saturday it opposed a U.S. decision to impose new quotas on some Chinese clothing imports, calling the move a violation of international standards of free trade.

The Bush administration announced Friday it would reinstate quotas on three categories of clothing imports from China, responding to pleas from domestic producers that a surge of Chinese imports was threatening thousands of American jobs.

The move "violates the spirit of free trade and the basic principles of the World Trade Organization," Chinese Commerce Ministry spokesman Chong Quan said in a statement on the ministry's Web site.

China is a dominant competitor in the $350 billion-a-year world textile trade, and its shipments into the United States spiked sharply after Jan. 1, when global quotas in effect for three decades were eliminated.

The latest U.S. action will impose limits on the amount of cotton trousers, cotton knit shirts and underwear that China can export to the United States — which American retailers argue will drive up prices for U.S. consumers.

It is unimportant that it violates the "principles" of the WTO or the "the spirit of free trade." What is relevant is that the Bush administration is violating free trade itself. Dr. Russell Roberts recently interviewed Dr. Gregory Mankiw, former Chairman of the Council of Economic Advisers. Dr. Mankiw said, "The President is very much a believer of free trade," which usually appears to be true.

It's ambitious that Bush has proposed eliminating tariffs on manufactured goods (not just the U.S., but across the globe). CAFTA and other Free Trade Agreements are a good thing, including ours with Australia, even if it was allegedly just a political reward. Even so, I don't think they go far enough. They're regulated, liberalized trade, not true free trade. Then I really sigh when Bush and his economic team take a step backward for every step forward. First the steel tariffs, now these quotas.

I agree with the PRC and say that the Bush administration is flatly wrong to place new quotas on Chinese goods. Of course the Chinese are looking out for their own self-interest. So am I. So should all other Americans. Americans benefit by purchasing low-cost cotton goods for less than if we made them ourselves; it increases our purchasing power. Now with the quotas, we'll have to pay more, even at Wal-Mart discount prices. Protectionists argue that we'll gain jobs by having to produce things ourselves, but don't they realize that jobs aren't gained at all? At best, they're only transferred. If a good is no longer imported and is produced domestically for $1 more, that's $1 less for the consumer to spend elsewhere (or save).

But it's worse than that. When we busy ourselves making cotton goods, we aren't making the software, aircraft, high-end machinery and other advanced goods that China, India, et al could produce but not very well. This is comparative advantage, the principle and motive behind all trade, not just at the national level, but the individual level too. What families today make their own clothes and shoes, or grow and raise their own food? Instead, we specialize according to our unique talents, and trading with each other maximizes our total production. The Bush administration is forgetting this. Yes, a few American textiles workers will be better off, but at the expense of everyone else. Society will pay more for the same goods. As Bastiat asked, why do you want to support scarcity? After all, that's what higher prices mean.

Bastiat wrote "The Candlemakers' Petition" to demonstrate the fallacy of protecting domestic industry. In his satire, the French government was asked to pass laws requiring people to close all doors and windows -- in fact, seal off any opening that sunlight might come through. This, the petition declared, will promote the entire economy! More candlemakers will be needed, and since they will require tallow, this will create more jobs involving the raising cows and sheep. Jobs will be created to produce lamp oil. Even Parisians will find jobs creating ornate chandeliers!

Of course the entire proposal is ludicrous, but Bastiat didn't once exaggerate the fallacial principles of protectionist economics. He merely applied them to an industry that nobody thinks to "protect" -- why should one industry be protected, and not another? Over 150 years later, the elegance of Bastiat's clarity still helps us see the simple reason why protectionism appears right but is actually wrong. In "protecting" via tariffs and quotas, government's sole aim is to maintain high prices so that domestic industry can stay in business. But high prices tend to encourage an oversupply of such goods, which normally would cause prices to drop. Then as domestric industry erroneously blames (or even lies) that downward pressure on foreign competition, government must restrict imports even more. Government can even purchase some of the excess supply to prevent falling prices.

If only that last part were fantasy: the U.S. federal government does that with certain types of agricultural subsidies. It pays farmers and ranchers so they won't grow crops or raise certain types of livestock; sometimes it's to pay them to destroy crops and livestock. It's a literal waste of perfectly good food, and a waste of effort because the farmers could have produced something instead. Yet this continues several decades after FDR initiated the subsidies, and even France is doing that for its wine industry. Professor Bainbridge noted the recent violence, "radical" winemakers bombing a government office in southern France, and I explained the bad economics behind the subsidy.

Protectionism simply inhibits progress. Not the absurd vision of "progress" that big government pushes on us, but true progress in the advancement of the human condition. When government supports one industry, it's necessarily at the expense of other industries; it's merely diverting from one to another. Bastiat in "What Is Seen" cautioned us not to mistake transfers for an increase, and even today, it is difficult for people to discern the difference. "But we'll have to produce those things ourselves, which will mean more jobs!" Indeed? If more people are needed to breed more cows and sheep for tallow, fewer people are raising oxen to plow fields. If people are creating cotton goods, they're not making high technology like microchips. Nowadays it's designing microchips, as China, India and Southeast Asia have a huge comparative advantage in semiconductor manufacturing. They have no comparative advantage in design, though. The bulk of R&D lies in developed nations, especially the U.S. and Japan. We also produce software, aircraft and heavy machinery that our poorer trading partners cannot easily make.

Second, protectionism promotes inefficiency. It gives artificial longevity to antiquated industries, or it prevents a society from developing newer industries. Should we have taxed the first automobiles to protect horse breeders and buggy manufacturers? Should we have taxed the first transistors to protect glassblowers and others involved in making vacuum tubes? Of course not, so why should we protect domestic textile industries that cannot compete?

But, protectionists object, the difference is that other countries are "stealing" the jobs. Protectionists insist that we need those jobs. Not so! If we're busy making textiles, cheap plastics or even low-end machine parts, we suffer the greater opportunity cost of not making high-end goods. We wouldn't have new software from Microsoft, Symantec and others, nor the latest Intel and AMD chips, and we're certainly not making Caterpillars and John Deeres. These are all products of greater value, which our trading partners cannot make without suffering greater opportunity costs. The Chinese could certainly produce entire Boeing aircraft, but it's more efficient for them to produce bolts and other basic metal components. It's more efficient for Boeing employees in the U.S. to produce entire aircraft, using low-end parts already made for them. If the Chinese tried to produce John Deeres and ship them to American customers, they'd suffer the greater opportunity cost of not making cotton T-shirts.

Consider that if Indians and Chinese are so competitive, if they're willing to work for a fraction of what an American counterpart would, why is the bulk of Microsoft still at Redmond? This is not to be racist, but by definition it means, for whatever reason, that Microsoft values one American more than several Indians or Chinese.

2 Comments:

I agree with the essential logic of free trade. However, it seems disingenuous for you to argue that the textile workers displaced would otherwise be working in the high-tech field, creating new technologies based on their high school education thirty years prior. If they could demand a higher salary in the higher-wage sector, economic theory would dictate that they would have already done so. It doesn't mean that the only job they could mantain would be their textile one, and you cannot prove that some may not end up being more productive in a different capacity. But to argue that these workers will suddenly lose ther textile jobs and make an immediate jump to the higher-wage fields seems a bit off to me.

Don't get me wrong, I'm a believer in free trade the long term efficiency of capital markets. However, in light of the fact that China is looking to parley their newfound econmic might into geopolitical and military power, I feel we may have to consider that in our national calcualtions of the cost of free trade, and it could change the balance. A certain percentage of Chinese profits go into their military- hwo high, I don't know, although I hope the CIA has at least a rough idea. Their military buildup- of fighter jets, troop transports, advanced weaponsry systems- has been well documented recntly for both its speed and capability. The Pacific Fleet is still considered more powerful, but the costs of mantaining our defenses to the Chinese buildup will undeoubtedly rise, partially as a result to the outflow of economic activity to China. They may deserve it on pure economic terms, but once the geoplitical costs are wieghed, it may not make as much sense. Please respond,as this has been bothering me for a couple of years as a capitalist and an American.

I didn't see your reply until today. I and other advocates of free trade never said that if American workers stop making textiles, they'll automatically or are somehow guaranteed to get jbos making high-end capital goods. What we're saying is that they can in Western economies, and it's their fault if they don't. Competition's a bitch, and if you can't find your own comparative advantage, you will not only fail, but you will deserve to fail.

Some say that government should offer retraining programs, but they're wrong. It's just another form of central planning (which protectionism is), since government will be determining what industries people should work in. Second, why should the rest of us be forced to pay (via taxes) for others? It may be to our benefit that someone will get a better job and produce more, but putting aside the practical reason that it's not guaranteed, it's flatly immoral to coerce the rest of us.

Similarly, the reason people can stick with low-end jobs is because government takes our money and supports them via protectionist measures. We have steel workers, sugar farmers, etc. who should be doing other things, rather than forcing us to sustain their living. Let the free market work, and they'll find their comparative advantage in time.

But as I've come to learn, this is the most important reason to support free trade: why should anyone be able to prevent me from making peaceful, voluntary transactions with someone of my choosing? It comes right back to people sustaining their livelihoods by using government to coerce me.

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"You are not to inquire how your trade may be increased, nor how you are to become a great and powerful people, but how your liberties can be secured; for liberty ought to be the direct end of your government."
- Patrick Henry, 1788